Deck 9: Classical Macroeconomics and the Self Regulating Economy

Question 1

If the economy is currently in a recessionary gap, the SRAS curve intersects the AD curve to the left of Natural Real GDP.

Answer 1

True

Question 2

If the economy is in long-run equilibrium, the actual unemployment rate is less than the natural unemployment rate.

Answer 2

False

Question 3

In a self-regulating economy, a recessionary gap will be eliminated by falling wages which will shift the SRAS curve to the right.

Answer 3

True

Question 4

For saving to increase, consumption must decrease, ceteris paribus.

Question 5

The classical economists believed that wages, prices, and interest rates were flexible in both the upward and the downward direction.

Question 6

Say's law states that demand creates its own supply.

Question 7

When the actual unemployment rate is less than the natural unemployment rate, the economy is in a recessionary gap.

Question 8

In a self-regulating economy, wages will fall and prices will rise when there is an inflationary gap.

Question 9

According to classical economists, Say's law applies to a barter economy, but it does not apply to a money economy.

Question 10

It is possible for the economy to be producing at a point that lies beyond its institutional production possibilities frontier (PPF), but not its physical PPF.

Question 11

If the structural unemployment rate is 2 percent, the frictional unemployment rate is 3 percent, and the current unemployment rate is 8 percent, then the economy is in a recessionary gap.

Question 12

Classical macroeconomists assert that "saving" is the same as "not spending at all".

Question 13

All economists agree that the economy is self-regulating.

Question 14

Business-cycle macroeconomics involves increases in Real GDP that result from a rightward-shifting LRAS curve.

Question 15

Natural disasters (such as the 2011 earthquake and tsunami in Japan) are examples of an adverse supply shock, which result in the SRAS curve shifting leftward.

Question 16

Classical economics refers to an era in the history of economic thought that stretched from the late 1600s to the mid-1800s.

Question 17

Due to their belief in interest rate flexibility, the classical economists argued that saving is matched by an equal amount of investment.

Question 18

In the long run, changes in aggregate demand will affect the level of Real GDP (but not the price level) in a self-regulating economy.

Question 19

If the structural unemployment rate is 3 percent, the frictional unemployment rate is 2 percent, and the current unemployment rate is 6 percent, then the economy is in a recessionary gap.

Question 20

When the economy is in a recessionary gap, the labor market is experiencing a surplus.

Question 21

When the economy is producing Real GDP at the level at which the LRAS curve intersects the AD curve the economy is

A)in a recessionary gap.
B)in long-run equilibrium.
C)in an inflationary gap.
D)operating at less than full-employment output.

Question 22

If Real GDP is less than Natural Real GDP, the economy is in

A)an inflationary gap.
B)a recessionary gap.
C)an unemployment gap.
D)a real gap.

Question 23

If the economy is in a recessionary gap,

A)Real GDP is greater than Natural Real GDP.
B)Real GDP is equal to Natural Real GDP.
C)Real GDP is less than Natural Real GDP.
D)the (actual) unemployment rate is less than the natural unemployment rate.
E)a and d

Question 24

The long-run aggregate supply (LRAS) curve is

A)horizontal.
B)vertical.
C)positively sloped.
D)negatively sloped.

Question 25

An economy is producing its Natural Real GDP when the unemployment rate is equal to the __________ unemployment rate.

A)frictional
B)structural
C)sum of the frictional unemployment rate and the structural
D)seasonal
E)cyclical

Question 26

If the economy is currently in a recessionary gap,

A)all economists will agree that the economy can remove itself from the recessionary gap without government intervention.
B)some economists will argue that the economy can remove itself from the recessionary gap without government intervention.
C)no economist will state that the economy can remove itself from the recessionary gap without government intervention.
D)all economists will agree that over time the recessionary gap will worsen.

Question 27

If the SRAS curve intersects the AD curve to the right of Natural Real GDP, the economy is

A)in a recessionary gap.
B)in either a recessionary gap or an inflationary gap, but we need more information to determine which one.
C)in an inflationary gap.
D)at full-employment Real GDP.

Question 28

Suppose the economy's short-run equilibrium is at a point to the right of Natural Real GDP. Which of the following statements is true?

A)The economy is in an inflationary gap.
B)The economy is in a recessionary gap.
C)The economy is in long-run equilibrium.
D)This situation is actually impossible.

Question 29

If the natural unemployment rate is 5 percent and the current unemployment rate is 6 percent, then the economy is

A)producing a level of Real GDP that is greater than the level of natural Real GDP.
B)in an inflationary gap.
C)producing a level of Real GDP that is less than the level of natural Real GDP.
D)a and b
E)b and c

Question 30

If Real GDP is greater than Natural Real GDP, the economy is in a(n)

A)frictional gap.
B)structural gap.
C)recessionary gap.
D)inflationary gap.

Question 31

The number of unpaid internships is more likely to rise in an economy when the economy is in a recessionary gap and wage rates are constant than when wage rates are falling.

Question 32

Economic-growth macroeconomics deals with increases in Real GDP due to a rightward-shifting AD curve.

Question 33

When the economy is producing the level of output equal to natural Real GDP, the unemployment rate is equal to

A)zero.
B)the natural unemployment rate.
C)the frictional unemployment rate.
D)the structural unemployment rate.

Question 34

If the SRAS curve intersects the AD curve to the left of Natural Real GDP, the economy is

A)in a recessionary gap.
B)at Natural Real GDP.
C)in an inflationary gap.
D)at full-employment Real GDP.

Question 35

Suppose the economy's short-run equilibrium level is at a point to the left of Natural Real GDP. Which of the following statements is true?

A)The economy is in an inflationary gap.
B)The economy is in a recessionary gap.
C)The economy is in long-run equilibrium.
D)This situation is actually impossible.

Question 36

If Real GDP is less than Natural Real GDP, then the (actual) unemployment rate is

A)less than the natural unemployment rate.
B)equal to the natural unemployment rate.
C)greater than the natural unemployment rate.
D)less than or greater than the natural unemployment rate, but we cannot determine which one.
E)b and d

Question 37

If the natural unemployment rate is 7 percent and the current unemployment rate is 5 percent, then the economy is

A)producing a level of Real GDP that is greater than the level of natural Real GDP.
B)in a recessionary gap.
C)producing a level of Real GDP that is less than the level of natural Real GDP.
D)a and b
E)b and c

Question 38

When the natural unemployment rate is less than the actual unemployment rate, the economy is in a recessionary gap.

Question 39

According to classical economists, most, if not all, markets are competitive.

Question 40

An economy that is operating on its institutional production possibilities frontier is operating at its natural unemployment rate.

Question 41

Exhibit 9-2

Refer to Exhibit 9-2. The economy is currently producing Q₁. At this level of Real GDP, the economy is experiencing

A)a shortage in the labor market.
B)a surplus in the labor market.
C)neither a shortage nor a surplus in the labor market.
D)all of the above are equally likely

Question 42

Exhibit 9-3

Refer to Exhibit 9-3. If the economy is in short-run equilibrium at point A,

A)the (actual) unemployment rate is less than the natural unemployment rate.
B)the (actual) unemployment rate is equal to the natural unemployment rate.
C)the (actual) unemployment rate is greater than the natural unemployment rate.
D)the relationship between the (actual) unemployment rate and the natural unemployment rate cannot be determined from the available information.

Question 43

When there is a recessionary gap, (actual) Real GDP is __________ Natural Real GDP, and the (actual) unemployment rate is __________ the natural unemployment rate.

A)greater than; less than
B)greater than; greater than
C)greater than; equal to
D)less than; greater than
E)less than; less than

Question 44

When there is an inflationary gap, (actual) Real GDP is __________ Natural Real GDP, and the (actual) unemployment rate is __________ the natural unemployment rate.

A)greater than; less than
B)greater than; greater than
C)less than; greater than
D)less than; less than
E)less than; equal to

Question 45

Exhibit 9-3

Refer to Exhibit 9-3. The economy is in long-run equilibrium at point

A)A.
B)B.
C)C.
D)D.
E)E.

Question 46

Exhibit 9-3

Refer to Exhibit 9-3. The economy is in short-run equilibrium and has an inflationary gap at point

A)A.
B)B.
C)C.
D)D.
E)E.

Question 47

Exhibit 9-1

Refer to Exhibit 9-1. If the economy is self-regulating, the price level is

A)lower in short-run equilibrium than in long-run equilibrium.
B)lower in long-run equilibrium than in short-run equilibrium.
C)higher in long-run equilibrium than in short-run equilibrium.
D)lower when the economy is in a recessionary gap than when it is in long-run equilibrium.
E)a and c

Question 48

A recessionary gap exists if (actual) Real GDP is __________ Natural Real GDP.

A)less than
B)greater than
C)equal to
D)b and c
E)none of the above

Question 49

An inflationary gap exists when AD and SRAS

A)fail to intersect.
B)intersect to the right of Natural Real GDP.
C)intersect to the left of Natural Real GDP.
D)both have a positive slope.

Question 50

In a self-regulating economy, inflationary and recessionary gaps produce shifts of the

A)AD curve that maintain the short-run equilibrium point.
B)AD curve that move the economy to a long-run equilibrium point.
C)SRAS curve that maintain the short-run equilibrium point.
D)SRAS curve that move the economy to a long-run equilibrium point.

Question 51

Exhibit 9-3

Refer to Exhibit 9-3. If the economy is in equilibrium at point B,

A)the (actual) unemployment rate is less than the natural unemployment rate.
B)the (actual) unemployment rate is equal to the natural unemployment rate.
C)the (actual) unemployment rate is greater than the natural unemployment rate.
D)the relationship between the (actual) unemployment rate and the natural unemployment rate cannot be determined from the available information.

Question 52

Exhibit 9-3

Refer to Exhibit 9-3. If the economy is in short-run equilibrium at point C,

A)the (actual) unemployment rate is less than the natural unemployment rate.
B)the (actual) unemployment rate is equal to the natural unemployment rate.
C)the (actual) unemployment rate is greater than the natural unemployment rate.
D)the relationship between the (actual) unemployment rate and the natural unemployment rate cannot be determined from the available information.

Question 53

Exhibit 9-1

Refer to Exhibit 9-1. The economy is currently producing Q₁. An economist who believes wages are flexible in the downward direction would most likely argue that

A)it is likely the economy will soon move to point B.
B)it is likely the economy will soon move to point A.
C)it is not likely the economy will move to point A without government intervention.
D)Real GDP will soon take a downturn.

Question 54

Exhibit 9-2

Refer to Exhibit 9-2. The economy is currently producing Q₁. At this level of Real GDP, the economy is in

A)an inflationary gap.
B)a recessionary gap.
C)long-run equilibrium.
D)none of the above

Question 55

Exhibit 9-1

Refer to Exhibit 9-1. The unemployment rate is lower at

A)Q₁ than Q_N.
B)Q_N than Q₁.
C)point A than point B.
D)point B than point A.

Question 56

Exhibit 9-1

Refer to Exhibit 9-1. The economy is currently producing Q₁. If an economist believes the economy can move itself without government intervention to Q_N, then the economist believes that the

A)LRAS curve will shift leftward until it intersects the SRAS and AD curves at Q₁.
B)AD curve will shift rightward and intersect the SRAS curve at point B.
C)SRAS curve will shift rightward and intersect the AD curve at point A.
D)economy will likely stay "stuck" in short-run equilibrium.

Question 57

Exhibit 9-1

Refer to Exhibit 9-1. The economy is currently producing Q₁. At this level of Real GDP, the economy is in

A)an inflationary gap.
B)a recessionary gap.
C)long-run equilibrium.
D)none of the above

Question 58

Exhibit 9-3

Refer to Exhibit 9-3. The economy is in short-run equilibrium and has a recessionary gap at point

A)A.
B)B.
C)C.
D)D.
E)E.

Question 59

A recessionary gap exists when AD and SRAS

A)fail to intersect.
B)intersect to the right of Natural Real GDP.
C)intersect to the left of Natural Real GDP.
D)both have a positive slope.

Question 60

In a self-regulating economy, inflationary and recessionary gaps

A)never occur.
B)are eliminated by forces internal to the economy, without government intervention.
C)are eliminated by timely actions of government policymakers.
D)are the desirable results of microeconomic price adjustments.

Question 61

Exhibit 9-4

Refer to Exhibit 9-4. When AD and SRAS cross at the point at which the price level is equal to P₁ and Real GDP is equal to Q₃, the economy is in

A)a recessionary gap.
B)an inflationary gap.
C)long-run equilibrium.
D)a and c
E)b and c

Question 62

Exhibit 9-5

Refer to Exhibit 9-5. Point G on graph (2) would correspond to the intersection of an AD curve and a SRAS curve at which point(s) on graph (1)?

A)I or J
B)K
C)L or M
D)I or L
E)J or M

Question 63

Exhibit 9-5

Refer to Exhibit 9-5. Imagine an AD curve and an SRAS curve intersecting at Point I on graph (1). Which point(s) would this correspond to on graph (2)?

A)A or B
B)C
C)D or E
D)F
E)G

Question 64

The physical production possibilities frontier illustrates the different combinations of goods that society can produce given

A)the constraints of finite resources and the current state of technology.
B)a constant price level.
C)its institutional constraints.
D)the natural rate of unemployment.
E)the constraints of finite resources and the current state of technology and institutional constraints.

Question 65

Exhibit 9-4

Refer to Exhibit 9-4. Which of the following is true at the Real GDP level of Q₃?

A)The unemployment rate is equal to the natural unemployment rate.
B)The cyclical unemployment rate is zero.
C)The economy is in long-run equilibrium.
D)all of the above
E)none of the above

Question 66

The more institutional constraints that exist in a particular society,

A)the closer the institutional PPF will lie to the physical PPF.
B)the farther out from the origin the institutional PPF will lie.
C)the closer to the origin the institutional PPF will lie.
D)the closer to the origin the institutional PPF will lie and the farther out from the origin the physical PPF will lie.

Question 67

Exhibit 9-5

Refer to Exhibit 9-5. Point C on graph (2) would correspond to the intersection of an AD curve and a SRAS curve at which point(s) on graph (1)?

A)I or J
B)K
C)L or M
D)I or L
E)J or M

Question 68

Exhibit 9-5

Refer to Exhibit 9-5. Point A on graph (2) would correspond to the intersection of an AD curve and a SRAS curve at which point(s) on graph (1)?

A)I or J
B)K
C)L or M
D)I or L
E)J or M

Question 69

The economy can operate

A)beyond its institutional PPF but not beyond its physical PPF.
B)on both its institutional PPF and its physical PPF, but not at the same time.
C)under its physical PPF but not under its institutional PPF.
D)a and b
E)a, b, and c

Question 70

If an economy is operating __________ its institutional production possibilities frontier, it is producing __________ output than it would be at full employment.

A)below; less
B)below; more
C)above; less
D)above; more
E)a and d

Question 71

The institutional production possibilities frontier illustrates the different combinations of goods that society can obtain given

A)the constraints of finite resources and the current state of technology.
B)the price level.
C)its institutional constraints.
D)the natural rate of unemployment.
E)the constraints of finite resources and the current state of technology and institutional constraints.

Question 72

Exhibit 9-5

Refer to Exhibit 9-5. Point B on graph (2) would correspond to the intersection of an AD curve and a SRAS curve at which point(s) on graph (1)?

A)I or J
B)K
C)L or M
D)I or L
E)J or M

Question 73

Which of the following statements is true?

A)The economy can operate outside (or beyond) its institutional PPF and its physical PPF, but only for a short while.
B)The economy can operate outside its physical PPF, if only for a short while, but can never operate outside its institutional PPF.
C)The economy can operate outside its institutional PPF, if only for a short while, but can never operate outside its physical PPF.
D)The economy can never operate outside its institutional PPF or its physical PPF, even for a short while.
E)none of the above

Question 74

Exhibit 9-4

Refer to Exhibit 9-4. Assume the economy is self-regulating and currently is in long-run equilibrium with the price level equal to P₅. If something happens that shifts the AD curve to the AD₁ position, the economy will eventually settle down at a long-run equilibrium point of __________.

A)P₅, Q₃.
B)P₄, Q₄.
C)P₃, Q₃.
D)P₃, Q₅.
E)P₄, Q₂.

Question 75

Exhibit 9-4

Refer to Exhibit 9-4. Assume the economy is self-regulating and currently is in long-run equilibrium with the price level equal to P₃. After an initial increase in U.S. exports, the economy will move to long-run equilibrium by a shift from

A)AD₃ to AD₁.
B)SRAS₁ to SRAS₂.
C)SRAS₂ to SRAS_1.
D)AD₃ to AD₂.
E)none of the above

Question 76

The unemployment rate is equal to the natural unemployment rate at

A)some point within the interior of the physical PPF but beyond the institutional PPF.
B)some point within the interior of the physical PPF, but we cannot locate it with more accuracy.
C)some point within the interior of the institutional PPF, but we cannot locate it with more accuracy.
D)every point on the institutional PPF.
E)every point on the physical PPF.

Question 77

Exhibit 9-4

Refer to Exhibit 9-4. Assume the economy is currently in long-run equilibrium with the price level equal to P₃. If foreigners begin to buy more U.S. goods, the economy will, in the short run, move to price level equal to _________ and Real GDP equal to _________?

A)P_2; Q₄.
B)P_3; Q₃.
C)P_4; Q₂.
D)P_4; Q₄.
E)P_5; Q₃.

Question 78

Classical economics refers to an era in the history of economic thought that stretched from about

A)1750 to the early 1900s.
B)1935 to the 1970s.
C)1800 to the mid 1900s.
D)1600 to the mid 1800s.

Question 79

Suppose the economy is self-regulating and the (actual) unemployment rate is less than the natural unemployment rate. This means that the economy is producing a level of output

A)above its natural level and will eventually cut back on output.
B)below its natural level and will eventually increase output.
C)below its natural level but no forces exist to automatically increase output.
D)above its natural level and institutional constraints will automatically be reduced so as to allow the economy to continue producing this level.
E)none of the above

Question 80

Exhibit 9-4

Refer to Exhibit 9-4. Assuming the economy is in an inflationary gap at a short-run equilibrium point with the price level at P₂, the movement toward long-run equilibrium will be

A)down and along AD₁.
B)up and along AD₂.
C)down and along SRAS₁.
D)up and along SRAS₂.
E)down and along SRAS₂.